LAS VEGAS–Many credit union leaders are letting their joy over interchange income cloud their thinking when it comes to a tipping point in payments, one analyst is cautioning.
In remarks themed “Future Freak: Techs Transforming Financial Services,” Lee Wetherington warned the joint meeting of the CUNA Technology Council and CUNA OpSS Council that a built-in bias among most credit union leaders has led them to misinterpret what’s taking place the payments space, much of which represents a threat to CUs. But he also sees some opportunities credit unions might leverage if they get moving.
Wetherington, director of strategic insight with Jack Henry & Associates, said he needs to look no further than his two teenage sons for a trend that should concern every credit union. Teenagers, he said, operate in a completely different world in terms of how they perceive money. He noted his sons are frequent users of prepaid cards, mobile banking, and mobile wallets, but their credit union doesn’t offer competitive offerings in those verticals, and have turned to other providers, he said.
For instance, both have been very satisfied with a PayPal student prepaid card, although that is now being pulled from the market due to new CFPB rules, said Wetherington.
“I share this because this was my son’s introduction to the way money works. It should be this easy,” said Wetherington. “In my mind this is where we should begin. We should begin at allowance. It’s the first milestone.”
There’s another milestone taking place, according to Wetherington, and it has far larger implications for credit unions.
He noted that at mid-year credit unions had passed a “tipping point” in interchange income.
“Interchange income accounts for 42% of non-interest income for credit unions,” he pointed out. “If card revenue continues to go up, you’re good. But I would submit to you that we are going to hit a tipping point in the growth rates of credit and debit. The biggest strategic bias we all suffer from is the tendency to assume that the past is a sufficient predictor of the future. That is almost never the case; we live in cycles. The tipping point I’m excited to announce: Of the two components of non-interest income, fee income and other income, for the first time in a long time the ‘other income’ component has officially outstripped the fee income component. In other words, fees for value have surpassed fees for punishment.”
But credit unions could be setting themselves up for a troubling comeuppance, he said.
“Credit unions are a bit cocky compared to banks in terms of how much growth is expected in card portfolios, especially in debit card portfolios,” said Wetherington, citing a study by PULSE in which credit unions said they expect 9% growth in debit cards this year, vs. banks that expect growth of approximately 5.5%.
“The reason for that is because you’ve been kicking butt and taking names in the card space,” he continued, pointing to data showing that in cards CUs have had a 29% acquisition rate vs. a 20% attrition rate. At banks the gap is much narrower. “But I want you to be very careful about some systemic headwinds headed everyone’s way. The first is that U.S. consumer preference for debit cards declined to 41% in 2015, down from 49% in 2013. Credit card preference held steady at 35%.”
Wetherington pointed to a report by Cornerstone Advisors that found many merchants have programmed their POS terminals to accept only PIN on EMV debit cards. “You know this old saw: we make more money on signature. Signature slows people down and it raises the fraud rate, but we make more money off that.”
What’s the problem? Wetherington said that for every 5% shift from signature to PIN transactions in debit, a credit union’s debit interchange is reduced by 20%. “And this is what we’re relying on to maintain our income momentum,” he said.
Other Headwinds Ahead
Other headwinds in payments:
- Delayed EMV deployment and exploding false-decline rates are deteriorating the cardholder experience
- Consumer preference for debit is stagnating/declining
- CNP fraud online is rising
- Device-based mobile wallets are dominated by credit cards
- EMV will accelerate signature-to-PIN transition
- Slow disappearance of POS payments
- Mobile-order-ahead-and-pay and BOLPUIS (Buy Online Pick Up In Store) give card-on-file merchants more immediate control of payment
Wetherington shared a personal example of his own of the risk in payments. Shopping away from his hometown at a Whole Foods, he attempted to pay using his then-new Apple Pay account, which was linked to his credit union account. The algorithm flagged him and he was given a false decline. So he quickly switched the default payment account to American Express—and it remains the default card.
“Forty percent of cardholders who are falsely declined never use the card again,” he said. “An additional 25% use it 15% less for an indefinite amount of time.”
Meanwhile, said Wetherington, debit card enrollment in mobile wallets is anemic, but half of issuers expect mobile payments to make up 25% of debit transactions within the next five years.
“There is a credit card bias built into mobile wallet schemes. Why? Because on any given day you don’t know the balance in your debit card account and you don’t want to get declined. So people default to a credit card.”
At the same time the mobile wallet ecosystem is fragmenting with the likes of Apple Pay, Samsung Pay, Walmart Pay, the soon-to-debut Target Pay, and more, he said.
Apple's Signal to the World
Wetherington sees a hint of what might be ahead in the removal of the headphone jack from the iPhone 7. It means merchants that use the Square device will need to use the adapter. But Wetherington believes it’s about much more.
“Look at this as Apple’s signal to the world that it has much bigger plans for Apple Pay,” he forecast.
Wetherington went on to tell credit unions “What you need to remember is the disappearance of POS payments will challenge issuers and their wallets and challenge your cards franchise.”
Wetherington said one opportunity for CUs might be in monetizing faster payments. “Strategically, this is the most important thing. If you look again at this great thing you’ve accomplished, fees for value surpassing fees for punishment, you want to continue that trend by diversifying this component a bit. And you do that in the payments space by monetizing the value of payments going faster rather than going slower.”
In the next 18-24 months, predicted Wetherington, credit unions will be making decisions about what real-time payments system they want to plug into. “This is a brand new fee-for-value component to bring into the fold.”
One good sign, said Wetherington, can be seen in Square’s announcement it is going to start offering instant P2P transactions with the premium being it plans to charge 1% of the value of the transaction.
“I’m not saying that’s the standard for the premium you will be able to assess, but it’s good news because two months ago there was an announcement from US Bank, which is an innovator in the faster payments space, that for same day transactions they would be charging $3.95, and for real-time transactions they would be charging $6.95. Then US Bank changed its mind and said it’s all free. So watch this space closely; it is a strategically important development.”
Four More Things To Watch
Some other observations made by Wetherington to the CUNA Councils’ meeting:
- “Buy Buttons” in social media have not been particularly effective. “It turns out you need interest with intent to buy. That’s what we call Contextual Commerce 2.0, which is the other big trend. This is scanning a VIN number at an auto dealer and it goes right to the credit union. The prequalified member gets an immediate financing option. Boom, show this to the dealer to get the car.”
- Under the category “Fraud Freaks,” Wetherington noted issuers have falsely declined $118 billion in transactions, which is 13 times the actual fraud of $9 billion. “It’s not just that you are losing the interchange; it’s the fallout from the false declines that really hurt you,” he said. “Issuers losses from improperly declined transactions, plus reduced future spend from dissatisfied cardholders, outpaces fraud losses four to one.”
- The best way to battle false declines, said Wetherington, is to give members granular-level mobile card controls over what are and are not legitimate transactions. “No algorithm, no matter how sophisticated, can give you the level of specificity that your cardholder member can.”
- On the horizon is Contextual Commerce 3.0 which wraps it in the context of the ability to buy in that moment. “Few can bring that to bear, but credit unions can,” he said.